First Solar (NASDAQ:FSLR), North America’s largest photovoltaics company, looks set to consolidate its position as one of the cost leaders in the solar industry following some significant improvements in technology and panel efficiency that have led to a lower manufacturing cost per watt for the company’s solar panels. In this note, we take a look at some of the factors that could give First Solar’s panels an edge over its competitors, particularly Chinese polysilicon based panel manufacturers going into 2014.
Trefis has a $58 price estimate for First Solar, which is slightly above the current market price.
- Why We Think First Solar Is Significantly Undervalued
- Clinton, Trump And The Future Of The U.S. Solar Industry
- Why We Cut Our Price Estimate For First Solar To $50
- First Solar Had A Solid Q2, But Contracting Remained A Mixed Bag
- First Solar’s Q2 Earnings Could Trend Lower On Less Favorable Revenue Mix
- First Solar Looks Address Its Balance Of Systems Handicap With Series 5 Modules
First Solar’s Costs Have Fallen Faster Than Chinese Competition
First Solar’s panels, which are manufactured using a cadmium telluride (Cd-Te) based thin-film technology, for a long time were the lowest cost panels in the industry. However, a precipitous decline in the prices of Chinese panels, which was brought about by a supply glut as well as lower raw material prices, threatened First Solar’s position over the last two years or so. However, last quarter, the company took some significant strides in reducing its core panel manufacturing costs (excluding freight, recycling and warranty charges) by around 12% sequentially to $0.49 per watt, which is now the lowest in the solar industry.  This also happens to be the largest quarterly cost reduction that the company has achieved in the last six years. In comparison, Yingli Green Energy (NYSE:YGE), China’s largest panel manufacturer, had core manufacturing costs of more than $0.53 per watt during Q3 2013.  The cost reductions are expected to be strong going forward as well. Based on data from the company’s analyst day presentation, management expects total cost per watt to fall by as much as 21% by 2015. 
Closing The Efficiency Gap
First Solar has been making progress in improving its panel conversion efficiency. As of October 2013, the efficiency for the company’s lead production line touched 13.9% and the company expects to be able to replicate this conversion efficiency across its other production lines as well over the next few quarters. While the rated efficiencies for First Solar’s panels do trail Chinese polycrystalline panels (which typically have efficiencies of around 16%), they have an advantage in real-world conditions. For instance, Cd-Te panels tend to perform well under a variety of lighting conditions and also have a performance edge in extremely hot climates since their output holds up better when compared to silicon-based panels which experience some performance degradation as temperatures soar (related: A Comparison Of Solar Technologies And What They Mean For Companies). First Solar’s efficiency road-map is also more aggressive when compared to some of its peers, and the company is targeting a panel efficiency of around 17% by 2016.
Rising Polysilicon Prices Could Help First Solar As Silicon Based Manufacturers Could See Costs Rise
The price of polysilicon, a key raw material used to manufacture silicon-based solar modules, saw a precipitous decline over the last three years or so. This played an important role in helping silicon-based solar panel manufacturers including China’s Yingli and Trina Solar (NYSE:TSL) cut manufacturing costs by over 50%. However, polysilicon prices are now just off their all-time lows and are expected to rise by as much as 25% over the next year, as global demand for solar products is expected to rise from around 35 gigawatts (GW) this year to close to 50 GW in 2014.  Polysilicon currently accounts for as much as 20% of the manufacturing cost of a silicon-based panel and a price increase will potentially impact the cost base of most Chinese manufacturers. This could prove positive for First Solar since its panels are based on Cd-Te technology and are not meaningfully impacted by polysilicon prices.Notes: